Supply Considerations Key As OPEC Members Head To Vienna

The Organization of Petroleum Exporting Countries (OPEC) is preparing to convene this week in Vienna for its final quota-setting meeting of the year. Potential tension may arise from attempts to accommodate future production increases in Libya, Iraq, and potentially Iran while hawks within the cartel are clamouring for action to stave off falling prices.

OPEC members represent more than one-third of global oil production but their influence has waned recently due to significant increases in non-OPEC production, particularly from American shale. In order to keep oil prices at what OPEC members consider the “fair price” of $100 a barrel, the organization needs to maintain or even reduce the current quota of 30 million barrels per day in the short-term. Venezuela’s Oil Minister Rafael Ramirez reiterated this point, arguing that OPEC will have to make room for production increases without raising the cartel’s production ceiling. “Within OPEC, those who have exceeded their production quotas simply will have to adjust” in order to “protect our price,” Ramirez said.

Falling supply from Libya, Iraq, and Iran has been met by record production out of Saudi Arabia and its GCC allies. As a result, it is likely that the brunt of required production cuts will come from the Gulf, says Samuel Ciszuk, an oil analyst at the Swedish Energy Agency. While Libya’s production crisis is likely a short-term episode, Iraq and Iran pose longer-term existential problems for the cartel.

Iraq is attempting to rebuild after Saddam-era sanctions and the U.S.-led invasion left its oil industry in tatters. The country aims to increase production by between 500,000 and 750,000 barrels a day in 2014 and to triple production to 9 million barrels a day by the end of the decade. Iraq received strong opposition to its production increases from fellow OPEC members. Mansour Moazami, an Iranian deputy oil minister, said “Iraq has behaved inappropriately in dealing with customers of Iranian oil.” Despite this, Iraq appears undeterred in its plans. "I don't think we can take orders from anybody [related to] the future of Iraq—especially Saudi Arabia and Iran," said Adnan Al Janabi, chairman of the oil and gas committee in the Iraqi Parliament.

Iran is also preparing for a production comeback, notwithstanding the fact that it is still subject to international sanctions regarding its nuclear programme. The tentative six-month deal reached last week provides a bit more certainty in the short-term and hope for a comprehensive deal by mid-2014. If sanctions are lifted, Iran could increase production by over 1 million barrels per day almost immediately as well as receive the international capital, technical expertise, and demand security needed to begin building up its production capacity over the coming decade. Thomas Pugh, an oil specialist at Capital Economics, estimates that a full re-entry of Iranian oil to world markets would immediately “knock $10 off the cost of a barrel of oil” unless corresponding production cuts were taken by fellow OPEC members. Historically, Iran has occupied the number-two position in OPEC, a position Tehran wants back.

It is unlikely that OPEC’s production quota will be altered at this week’s meeting but the tension leading up to the event indicates that the future balance within the cartel is far less certain.